Posts of July 2007

Outsourcing Jetliner Production

♠ Posted by Emmanuel in Supply Chain at 7/31/2007 03:55:00 PM

Fortune Small Business has a good 'un on how the jetliner titans Boeing and Airbus are increasingly "outsourcing" aircraft component design and manufacture to other firms. In the case of Boeing, it's being frequently farmed out or devolved to smaller firms that may be able to perform R&D tasks quicker--hence the article appearing in Fortune Small Business. The focus of the article is on the hugely successful rollout of the Boeing Dreamliner 787, which so far has clobbered Airbus in terms of order book entries with some help from a faster promised delivery time compared to Airbus's A350 which has had comparatively few takers so far. Part of the reason why the 787 has been rolled out so quickly is that individual suppliers have been given larger roles in the development of the aircraft:

The Boeing 787 Dreamliner is aptly named. When it lifts off the runway at PAE Paine Field in Everett, Wash. for its first test flight this summer, it will carry the dreams of more than 900 small subcontractors that helped create it. With 584 copies on order as of June, it's the fastest-selling new plane in the history of commercial aviation and will keep Boeing and its suppliers busy for a decade or longer.
For some subcontractors, catching a ride on the 787, which rolled out Sunday, will be their big break. Missing the flight has already put one would-be contractor in peril: Thermion Systems International (See "Iced out of a deal with Boeing?"), which thought it had a deal to supply de-icing equipment, says it was elbowed out of the program and is struggling to survive.
The 787, a midrange cruiser, is packed with technological firsts, including the pioneering use of composites in a commercial liner's airframe. Equally remarkable is the way in which Boeing has structured its manufacturing process, bestowing unprecedented opportunities on small suppliers and ushering in a new era for the aerospace industry.
Boeing says 70% of the 787 has been outsourced; rival Airbus is relying on subcontractors for about 50% of its A350 plane, now in development. "This farming-out of the airplane's construction is revolutionary," says Richard Aboulafia, vice president at Teal Group, an aerospace consulting firm (tealgroup.com).
For decades, Boeing has outsourced a portion of the work on its planes, and its reliance on sub-contractors has risen with each succeeding generation of aircraft. But with the Dreamliner program, the aerospace giant has reached a point where its role has changed. It now functions less as a manufacturer than as a project manager, supervising its first- and second-tier subcontractors, each of which may rely on scores of more specialized subcontractors. Boeing handles final assembly, marrying the cockpit, fuselage, wings, and tail sections, which are completed elsewhere and delivered to its plant. "Boeing's objective is to get these 'supplier partners' to do as much heavy lifting as possible," Aboulafia says. "That gives small businesses more responsibility."
Boeing says it can't supply a full list of subcontractors that are working on the project, but industry analysts estimate that their numbers are greater than the 900-plus that contributed to the 777, which began construction in 1990. Boeing spokesperson Loretta Gunter confirms that the processes used to construct the two planes are markedly different. "We have fewer first-tier subcontractors on the 787 than we did on the 777 because each is providing bigger components," she says. "Likewise, many of them are contracting out bigger jobs to their subs."
Boeing's new manufacturing template has captured the imagination of the aerospace industry. Recently officials from Airbus told analysts that the company will up its outsourcing to become more competitive. "For any company that wants to be successful in aerospace manufacturing, Boeing's new strategy is the way forward," says Aboulafia. "Which is ultimately good news for small business."
It's already good for Kreisler Manufacturing in Elmwood Park, N.J. Kreisler started out as a jewelry manufacturer, but when things got tough in that business, management decided its metal-finishing skills could be transferred to the aerospace industry. To cut costs and get into the European stream of the global outsourcing system, it invested in a new 52-employee machine shop in Kraków, Poland. "Our presence in Poland made us competitive from a global standpoint," says Brad Barnes, 53, Kreisler's director of sales and marketing.
Kreisler became part of the Dream-liner program through Rolls-Royce, which was hired to develop engines for the plane. Rolls contracted with multinational conglomerate Parker-Hannifin to make the fuel and hydraulic-flow systems. Parker-Hannifin hired Western Filter Group, a company based in Valencia, Calif., to supply the filtration equipment for the 787's hydraulic system, and it gave the order for fuel-manifold and associated tubing for the engines to Kreisler. As part of that agreement, Kreisler received certification from Rolls-Royce for various types of welding work. Having demonstrated its expertise on the 787, Kreisler is prepared to take on more projects for Rolls-Royce, which would become the company's first European customer.
Not only is Boeing pushing responsibility out to more subs, it is also demanding more from them. Many have created new systems and products, rather than simply filling orders to Boeing specs.
Green Hills Software of Santa Barbara, for example, won the assignment to write the operating system for the on-board flight-control computers. That's the kind of critically important work usually reserved for tier-one contractors. Green Hills was hired by tier-one contractor Honeywell, which specified Green Hills as part of its work for Boeing on the flight-control system. "Honeywell doesn't specialize in operating systems," says Dave Chandler, senior vice president of sales for Green Hills. "It's easier for us to handle because that's the only thing we do."
American Panel, based in Alpharetta, Ga., is another small company entrusted with critical technology and another small player whose product was identified specifically by a larger contractor when dealing with Boeing. It supplies LCD displays that go into instrumentation systems built by Astronautics Corp. of America. "Being able to create a display that's readable in bright sunlight is a very narrow niche," explains Jim Niemczyk, vice president of business development for American Panel. He's convinced that riding in the 787 is just the start: "Once our screen is on the latest, greatest plane, Boeing is going to want to retrofit it on all of them," he says...

(The original article has several examples of the smaller subcontractors taking expanded roles in the R&D of the mighty 787.)

Chinese Officials' Green Promotion

♠ Posted by Emmanuel in China,Environment at 7/31/2007 03:45:00 PM

Coming nearly at the same time as the news that China intends to restrict credit to enterprises that repeatedly flout environmental regulations is this bit of information which suggests the promotion track of apparatchiks will be modified. Previously, efforts to curb pollution met resistance among local officials, for promotion was based on achieving economic growth targets. This did not sit very well with containing investment in heavily polluting industries in many instances. Local government officials were not really incentivized to shoo away smokestack enterprises that could boost growth despite damaging the environment. When faced with a choice between investment and the environment, the former usually won regardless of pollution mandates.

China Daily now mentions that the career ladder of the Communist Party faithful will be shifted to meeting pollution control targets instead of focusing mostly on growth targets. It's news that again sounds good on paper. As always, though, implementation is a whole 'nother matter. That implementation dates are not being given is not a particularly encouraging start:

The central government is setting up an accountability system under which officials' career paths will be tied to their performance in environment protection and energy efficiency.

The move aims to steer the country toward a more environment-friendly road to economic growth.

The State Council, China's cabinet, is working on the "environmental veto system", under which green efforts will be a decisive factor in determining the future of government and Party officials, a senior policymaker told China Daily.

Previously, the assessment of officials focused on their performance in areas such as economic growth, family planning and workplace safety.

The central government will demand full compliance with the accountability system from heads of local governments and Party committees as well as their deputies charged with energy conservation and environmental protection, said He Bingguang, deputy director of the resource utilization and environmental protection department of National Development and Reform Commission (NDRC).

The system will help keep local governments in step with the central government, which is "resolutely committed" to energy conservation and emission control. China's goal is to cut its energy consumption per unit of GDP by 20 percent and pollutant discharge by 10 percent from 2006 to 2010.

The NDRC official declined to set a timetable for implementation of the new official assessment system.

In early July, the official revealed, inspection teams from the central government discovered that some local governments had kept investing heavily in resource-intensive industries, ignoring Beijing's call for the reduction of energy use and greenhouse gas emissions.

In fact, the official said, the central government started to set targets for officials in 2006 - of lowering energy consumption per unit of GDP by 4 percent annually till 2010.

However, a recent survey shows, except for Beijing, no provincial government succeeded in delivering on the targets. [Somehow I am not surprised.]

Taking that into consideration, NDRC has decided that officials should be assessed on a five-year performance rather than in a single year.

Environmental experts applauded the proposed "veto system" but also warned that it might be hard to put into practice. "Local governments face huge difficulties in saving energy," said Huang Shengchu, head of the China Coal Information Institute (CCII), affiliated to the State Administration of Work Safety. "The new system will affect many officials if you are to measure their performance by environmental targets. And there is a likelihood that many of them would fail."

Huang, a senior researcher in work safety and coalmine gas management, said the new system will demonstrate the will of the central government but in practice, it may meet resistance.

China: no Pollution Control, no Credit

♠ Posted by Emmanuel in China,Environment at 7/31/2007 03:35:00 PM

Chinese officials are taking a new approach to attacking China's mounting environmental woes caused by rapid industrialization. To me it makes sense, at least on paper: enterprises that continually flout environmental regulations are to be denied access to credit. Of course, implementing this new scheme is an entirely different challenge. First, just how stringent are these environmental regulations? Second, are increasingly independent, growth target-minded local governments really going to allow these regulations to be implemented? Third, just how tightly will access to credit be squeezed by banks and other financial service providers? Again, loopholes may be possible, as they usually are in lightly regulated "frontier" economies like what China has, difficult as it is for us to imagine sometimes. These are all pertinent questions. From the official China Daily:

The Chinese environmental agency is working with the banking authorities to identify companies that fail pollution checks or bypass environmental assessments for new projects and to restrict their access to fresh credit.

Pan Yue, the deputy chief of SEPA, the State Environmental Protection Administration, said the country should use more economic muscle to fight air and water polluters as he listed some polluting companies that would be barred from borrowing money from banks.

The credit blacklist was the most forceful measure the environment agency could impose to clean up rivers in China, Pan said in comments posted on the SEPA Web site.

But, he added: "It cannot fundamentally contain the trend of worsening pollution, and we need the force of even more combined economic levers."

The World Bank estimates that about 460,000 Chinese die prematurely each year from ailments related to water and air pollution and that about 300,000 others die from indoor toxins.

"The severe state of China's environment shows that the emissions-reduction measures of a few specialized agencies are limited and we must unite with more macroeconomic departments," Pan said.

One of the factories on the blacklist, an agricultural chemical plant in Bengbu, Anhui Province, dumped ink-black waste into a river, the Xinhua news agency reported. The plant was part of an industrial cluster that villagers said had contributed to a sudden increase in cancer and other illnesses in the area, the report said.

Pan, an ambitious advocate of tougher envionmental controls, has seized an opportunity opened by broader government efforts to punish errant factories, even if punishment leads to slower economic growth.

But local banks and many officials who are eager to encourage economic growth appear unlikely to embrace Pan's plea for "green credit."

The central bank, the People's Bank of China, recently asked commercial banks to stop lending to those who pollute and to call in loans to projects banned by the government. But at the end of May, the major Chinese banks had 1.5 trillion yuan, or US$198 billion, in medium- and long-term loans outstanding to energy-intensive and polluting sectors, up 21.8 percent from a year earlier.

Pan said that he expected the People's Bank of China and the China Banking Regulatory Commission to restrict credit to the companies identified on the blacklist. And he promised additional measures to come.

Attack of the SWFs

♠ Posted by Emmanuel in Middle East at 7/30/2007 02:11:00 PM

Purportedly, sovereign wealth funds (SWFs) are becoming more aggressive in their operations according to the Wall Street Journal. This article provides a good backgrounder on SWFs in operation. Particularly interesting is the backlash against them in the home countries of target firms:

Foreign governments, flush with cash and no longer content with the meager returns to be had on safe but low-yielding investments like Treasurys, are becoming increasingly aggressive players on the equity front.

The new boldness of these government-controlled investors was on display Sunday night when entities controlled by the governments of China and Singapore agreed to invest as much as $18.5 billion in return for stakes in the big British bank Barclays PLC.

In doing so, Chinese lender China Development Bank and Temasek Holdings Pte. Ltd., the Singapore government's investment agency, could play a role in the outcome of the biggest bank-takeover battle ever. That increasingly bitter contest pits Barclays against a consortium of European banks led by Royal Bank of Scotland Group PLC in seeking to acquire Dutch banking giant ABN ABN Amro Holding NV.

The Barclays deal is the latest in a string of investments in U.S. and European companies by governments in Asia and the Middle East. Temasek last year became the largest shareholder in London-based Standard Chartered PLC, a bank that has most of its assets in Asia. In May, the Chinese government invested $3 billion in Blackstone Group on the eve of the U.S. private-equity giant's initial public stock offering.

And last week, an investment fund controlled by the government of Qatar made a $21.8 billion takeover approach for British supermarket chain J Sainsbury PLC, one of the largest potential acquisitions ever by a state-owned fund. hile potentially boosting their investment returns, such deals expose the government-controlled funds and other entities involved to risks that range from simple investment losses to political backlash. If it continues, the trend could also reshape global financial markets, bidding up prices for more speculative assets like stocks, corporate bonds and real estate, while crimping demand for safer investments like Treasury bonds.

"There has been a fairly spectacular increase in financial assets under management by governments," said Dominic Wilson, director of global macro and markets research at Goldman Sachs Group. "The scale of the issues around such nvestment is different than anything the world has ever seen. Neither [governments] nor the arkets know exactly what they should do with the assets."

China Development Bank plans to invest as much as $13.5 billion in Barclays, in what could become the largest overseas investment by a Chinese company to date. The planned investment is part of a broader deal that also includes as much as $4.97 billion in funding from Temasek, and would enable Barclays to buttress its bid for ABN Amro.

Should Barclays succeed in acquiring the Dutch bank, the deal ultimately could leave China Development Bank with a stake of about 8% in the newly enlarged Barclays, making it by far the biggest shareholder.

If completed, the Barclays deal would provide further evidence of an important global shift in wealth. "This is basically a flow of capital from merging markets to established markets," says John Studzinski, former chief of investment banking at HSBC Holdings PLC and now head of Blackstone Group's mergers-and-acquisitions advisory group, which advised China Development on the deal. The private-equity firm's role shows how private and public investors are joining together to create powerful forces.

"Going forward, you have to look at where wealth is being created...I think it's a very logical trend," adds Mr. Studzinski.

To be sure, investors controlled by foreign governments have bought stakes in Western companies before. One example, the Kuwait Investment Office, which grew into an investment heavyweight as oil prices boomed in the 1970s, amassed sizable holdings in several major companies, including the then-British Petroleum and Germany's Daimler-Benz AG. But what distinguishes the latest wave of investment is the sheer size of the sums involved, which could give those investors the potential to affect strategy and bolster or block corporate transactions like takeovers.

China Development Bank's agenda in the Barclays deal is somewhat unique, say people close to it. It hopes that substantially expanding its existing, but narrower, relationship with the 300-year-old British bank will help accelerate its own transformation from a policy institution to more of a commercial bank, and give it a much higher profile overseas.

But many other recent deals reflect the quest by China and other countries for higher returns on their mounting foreign-exchange reserves. Those holdings traditionally were invested in safe, liquid investments that could be quickly converted to cash to buy up local currency if it came under speculative attack. But in many countries, especially China and the oil-producing nations of the Middle East, global trade has swelled those holdings to far more than might be needed to stabilize their currencies.

Since 2002, such holdings have increased 20% a year, according to U.S. Treasury calculations, well ahead of the average 6% rate of 1997-2001. Global foreign-exchange reserves now stand at about $5.6 trillion. An additional $1.5 trillion to $2.5 trillion held by "sovereign wealth funds" brings total assets controlled by governments to "roughly $7.6 trillion," or 15% of global gross domestic product, the Treasury says.

As a result, governments are treating these reserves less like rainy-day funds and more like pools of investment capital.

Sameer Al Ansari, executive chairman and chief executive officer of state-back investment firm Dubai International Capital, says he is scouring the world's 500 largest publicly traded companies looking for a place to invest as much as $10 billion. His next target: a U.S. company that he has already identified but will only describe as "a household name."

Mr. Ansari says Dubai International, which has $6 billion under management, is hoping to announce the U.S deal in September. His company bought a major stake in London-based HSBC Holdings PLC earlier this year, and this month bought 3% of Airbus maker European Aeronautic Defence & Space Co. and 3% of India's ICICI Bank Ltd.

The new wave of investment carries numerous risks. Most obvious is the potential for political backlash. Political pressure to block or restrict these investments appears to be mounting.
In the U.S., a Dubai company's deal last year to buy a British ports operator that operated several American ports ran into political obstacles, as did a 2005 attempt by Chinese oil company Cnooc Ltd. to buy U.S. oil producer Unocal Corp. Dubai Ports World ultimately agreed to sell off the U.S. holdings, and Cnooc pulled out of the Unocal bidding.

In Europe, there is a rising clamor to restrict foreign investment. German Chancellor Angela Merkel said last week that state-controlled investors might use stakes in European companies to pursue political, rather than only financial, goals. The European Union should think about ways to protect its firms from politically motivated buyers, she said, mentioning the U.S.'s interagency Committee on Foreign Investment in the U.S. as a possible model. CFIUS reviews the national-security aspects of overseas deals.

Others have been more outspoken. Ms. Merkel's powerful conservative colleague Roland Koch, governor of the German state of Hesse, has warned in stark terms about encroachment by industrial groups such as Russia's OAO Gazprom, as well as financial investors controlled by China and other emerging economies. "We haven't only recently gone through the trouble of privatizing companies like [Deutsche] Telekom and Deutsche Post so that the Russians can nationalize them again," he told German media.

Even the idea of such sales could inflame nationalist passions, as occurred last year when there were riots in Thailand following Temasek's attempt to buy Thai telecommunications provider Shin Corp.

Critics say backlashes could go beyond issues of foreign investment and hurt global trade. "Once you start to define what sensitive sectors are, you realize that clever lobbyists can identify nearly every sector as sensitive, because everything is connected with everything," says Norbert Walter, chief economist at Deutsche Bank in Frankfurt. "This will open a wide door for protectionism," he says.

Another risk is that the investments go bad. The financial landscape is littered with examples of foreign buyers being duped by savvy locals into overpaying for assets. The Singaporeans, for example, lost money on dot-com flameouts.

"The government's management of its hoard of cross-border assets either in the form of reserves or in some type of sovereign wealth fund is likely to be a source of political controversy and frictions as the inevitable losses are recorded," Edwin Truman, a former U.S. Treasury official and now a senior fellow at the Peterson Institute for International Economics, warned in a recent speech.

The trend toward more aggressive government investments also has the potential to reorder global financial markets. "We have entered a whole new world," says Jim O'Neill, head of Global Economic Research for Goldman Sachs International in London. "We are at the early stage of a secular process where the relations between the prices of stocks and bonds will change. The whole world is discovering the equity culture."

While Singapore's Temasek, which manages about $85 billion in assets, has long invested in private companies mostly in Asia, the Barclays deal launches onto the international stage a large but so-far little noticed Chinese institution. In contrast to Temasek, whose main role is to invest government money, China Development's main business is lending to companies and local governments for government-backed infrastructure projects in China.

Under 62-year-old chief Chen Yuan, China Development Bank has been run increasingly like a commercial entity, and one with a growing international agenda. China Development boasts an international advisory council including major figures in global finance like Maurice "Hank" Greenberg, the former head of insurer American International Group, and Sir Edward George, former Bank of England governor.

Mr. Chen is the son of one of the Chinese Communist Party's most senior early leaders, the late Chen Yun, who along with Mao Zedong and Zhou Enlai isenshrined in modern Chinese political lore as one of the party's "Eight Immortals." The younger Mr. Chen graduated from Beijing's prestigious Tsinghua University, and served for many years as a Chinese central bank official before taking the helm at China Development in 1998.

Under terms of the Barclays deal, China Development will buy up to €2.2 billion ($3 billion) of new Barclays shares initially, amounting to a 3.1% stake. China Development will then buy as much as €7.6 billion worth of additional Barclays's shares, if the British bank's bid for ABN succeeds, and if regulators agree. China Development had just $6.6 billion in cash and cash equivalents at the end of last year. To finance the deal, it will raise funds by issuing debt on China's domestic market.

Genetically Modified Organisms

♠ Posted by Emmanuel in Health at 7/30/2007 01:35:00 PM

The next frontier for biotech appears to be in flogging genetically modified organisms for food production. Although genetically modified foods in the form of grains and vegetables have generally proven acceptable Stateside--or at least Americans don't express so much disapproval of it unlike, say, the Europeans--modifying animals may be a trickier proposition as it involves, ah, livestock. Hence, growing activity in this space is hinged on regulatory approval of such foods Stateside. Strangely enough, this nascent industry is seeking more regulation to ensure consumer confidence. Again, I don't think Europeans will be so open to this latest edition of "Frankenfoods." However, I think Americans will be more accepting, or at least indifferent to the introduction of GMOs. From the International Herald Tribune:

This little piggy's manure causes less pollution. This little piggy produces extra milk for her babies. And this little piggy makes fatty acids normally found in fish, so that eating its bacon might actually be good for you.

The three pigs, all now living in experimental farmyards, are among the genetically engineered animals whose meat might one day turn up on American dinner plates. Bioengineers have also developed salmon that grow to market weight in about half the typical time, disease-resistant cows and catfish needing fewer antibiotics, and goats whose milk might help ward off infections in children who drink it.

Only now, though, do U.S. officials seem to be getting serious about drafting rules that would determine whether and how such meat, milk and filets can safely enter the nation's food supply.
Some scientists and biotechnology executives say that by having the Food and Drug Administration spell out the rules of the game, big investors would finally be willing to put up money to create a market in so-called transgenic livestock.

"Right now, it's very hard to get any corporate investment," said James Murray, a professor at the University of California, Davis, who developed the goats with the infection-fighting milk. "What studies do you need to do? What are they looking for?" he said, referring to government regulators. "That stuff's not there."

But some experts caution that even if the clears the regulatory path in coming months, investors and agribusiness companies might still shy away. Many fear that consumers would shun foods from transgenic animals, sometimes referred to as genetically modified organisms...

"The companies we have spoken to have gone organic, and they are very concerned, at least up to the present time, of having associated with their name," said Cecil Forsberg, a professor at the University of Guelph in Ontario, Canada, who helped developed the "Enviropig" with the cleaner manure. Smithfield Foods, for one, the world's largest hog producer and pork processor, says it is doing no research on genetically engineered animals.

Critics say changing the genes of animals could lead to potentially harmful changes in the composition of milk or meat, like the introduction of a protein that could cause allergic reactions. They say there could also be risks to the environment if, for example, extra-large salmon were to escape into oceans and out-compete wild salmon for food or mates. Some also say that some of he processes used to create transgenic livestock can harm the animals themselves.

The U.S. guidelines would come after more than 15 years of talks and false starts at the , a delay irking not only developers of the transgenic animals but also critics of biotechnology. "The fact that the agency has sat there for years staring this problem in the face and really hasn't come up with a clear way to regulate this is abdicating its responsibilities," said Joseph Mendelson, the legal director of the Center for Food Safety, a Washington advocacy group.
Even now, the will not say when the rules will be ready.

"We want to get it out, but we also want to get it right," said Julie Zawisza, a spokeswoman for the agency, which declined to make any other officials available for comment.

Some industry executives and former and current government officials say one reason for the delay was that some government officials, in part because of a preference for fewer regulations, wanted less stringent rules than the is considering.

Meanwhile, the biotechnology industry is actually pushing for the tougher standards. "Our overarching goal is to have public confidence in our products," said Barbara Glenn, the managing director for animal issues at the Biotechnology Industry Organization, a trade group. "We won't have that unless we have a very strong review process."

The is turning to transgenic animals after having tentatively declared in December that milk and meat from livestock that is cloned — but not otherwise genetically manipulated — was safe for people to eat...

Stupid Executive Tricks

♠ Posted by Emmanuel in CSR at 7/29/2007 11:25:00 AM

We can talk about corporate social responsibility (CSR) all day, but apparently some executives are still keen on extracting superior rents through means on the foul side of acceptable behavior. First is this item highlighting that executives who shower favors on stock analysts are more likely to get favorable ratings for their firms. Favors were more frequently offered as earnings performance failed to meet expectations set by the Street. While this point may seem obvious, the empirical research that has gone into making this conclusion appears quite substantive. From the Financial Times:

US executives have been able to secure more favourable research ratings for their companies from investment banks by bestowing professional favours on Wall Street analysts, according to new academic research to be published on Friday.
The study found that by offering analysts favours, ranging from recommending them for a job to agreeing to speak to their clients, executives sharply reduced the chances of a downgrade in the aftermath of poor results or a controversial deal.
The unprecedented research, carried out on some 1,800 equity analysts and hundreds of executives, suggests that the radical regulatory reforms of the past few years have failed fully to eradicate conflicts of interests on Wall Street.
“Favour-rendering to analysts is evidently widespread and . . . it seems to be compromising the value of the guidance these experts provide to investors,” said Michael Clement of University of Texas, who co-authored the study with James Westphal of University of Michigan.
Analysts’ representatives said that accepting favours such as those described in the study – which also include putting analysts in touch with executives at other companies and advising on personal matters – was unethical.
“Activities such as these are in clear breach of our code of conducts and standards. Analysts should guard against both actual conflicts and the perception of conflicts,” said Kurt Schacht, director of the Center for Financial Market Integrity at the CFA Institute, which represents more than 80,000 analysts and fund managers.
But, according to the study, conducted between 2001 and 2003 and to be presented to next month’s annual meeting of the US Academy of Management, nearly four out of six Wall Street analysts admitted receiving favours from company executives.
The frequency of favours increased in line with the shortfall between the company’s earnings and market expectations – a crucial determinant of analysts’ stock ratings.
The favours were instrumental in securing better treatment from analysts. Analysts who received two favours were 50 per cent less likely than colleagues to downgrade the company after poor results, the academics say.
The most popular favour, mentioned by nearly a third of respondents, was putting an analyst in touch with an executive at a rival firm, followed by the offer of career advice, and agreeing to meet with the analysts’ clients.

Nest up is a more arcane note in the FT on how some dastardly CEOs and CFOs are coming up with elaborate hand signals to pass financial information to their pet analysts to defeat new legislation on insider trading:

Southern Europeans have long had a reputation for accompanying their talk with theatrical hand gestures. But Italian and Spanish chatterboxes could be facing competition from an unlikely quarter: US corporate executives.
Wall Street observers say there is anecdotal evidence that some chief executives and chief financial officers have begun using coded hand movements to pass on additional financial information to particular analysts.
The trick, akin to the covert advice given to tennis players from coaches in the stands – and just as illegal – could be designed to get round a ban on the selective disclosure of price-sensitive information to “favoured” analysts.
Known as Regulation FD – for “fair disclosure” – the rule was introduced seven years ago by the Securities and Exchange Commission to clamp down on insider trading.
“We have heard of the use of hand signals and gestures to get round Reg FD,” says Kurth Schacht, director of the Center for Financial Market Integrity at the CFA Institute, the professional body for analysts. Mr Schacht declined to name specific instances. But if he is right, regulators will soon have to police the hands, as well as the lips, of corporate executives.

PIMCO's Bill Gross, Populist

♠ Posted by Emmanuel in Casino Capitalism at 7/27/2007 03:20:00 PM

Color me skeptical when the manager of the world's largest bond fund strikes a populist pose. Yet here it is, PIMCO's Bill Gross railing against private equity and hedge fund operators while bemoaning growing inequality Stateside. (If i didn't know better I'd have thought that he was running for office as a Democrat.) I can't exactly say Bill Gross is doing poorly as recent global jitters over loose money have sent investors back to bond-landia. Gross even calls for more government action in the form of equitable taxation to level the playing field. Despite his exalted status as one of if not the world's premier bond trader, Gross appears to be a traditionalist at heart who is wary of all these newfangled financial instruments whose use is made possible by loose money conditions--or at least until recently:

"The rich are different from you and me," wrote Fitzgerald and I suppose they are, but the differences – they wax and wane with the economic tides. Gilded ages come, go, and are reborn on the monsoon cloudbursts of seemingly intangible forces such as globalization, innovation, and favorable tax policy. For the rich to be truly rich and multiply their numbers, they need help. Adept surfers they may be, but like all riders, the wealthy need a seventh wave that allows them to preen their skills and declare themselves masters of their own universe, if only for a moment in time. That the golden glazed surfboards of the 21st century seem unique with their decals of "private equity" and "hedge finance" is mostly a mirage. Wealth has always gravitated towards those that take risk with other people’s money but especially so when taxes are low. The rich are different – but they are not necessarily society’s paragons. It is in fact society’s wind and its current willingness to nurture the rich that fills their sails.
What farce, then, to give credence to current debate as to whether private equity and hedge fund managers will be properly incented if Congress moves to raise their taxes up to levels paid by the majority of America’s middle class. What pretense to assert, as did Kenneth Griffin, recipient last year of more than $1 billion in compensation as manager of the Citadel Investment Group, that "the (current) income distribution has to stand. If the tax became too high, as a matter of principle I would not be working this hard." Right. In the same breath he tells, Louis Uchitelle of The New York Times that the get-rich crowd "soon discover that wealth is not a particularly satisfying outcome." The team at Citadel, he claims, "loves the problems they work on and the challenges inherent to their business." Oh what a delicate/tangled web we weave sir. Far better to admit, as has Warren Buffett, that the tax rates of the wealthiest Americans average nearly 15% while those of their salaried and therefore less incented assistants just outside their offices are nearly twice that. Far better to recognize, as does Chart 1, that only twice before during the last century has such a high percentage of national income (5%) gone to the top .01% of American families. Far better to understand, to quote Buffett, that "society should place an initial emphasis on abundance but then should continuously strive to redistribute the abundance more equitably."

Buffett’s comments basically frame the debate: when is enough, enough? Granted, American style capitalism has fostered and encouraged innovation and globalization which are the fundamental building blocks of wealth. That is the abundance that Buffett speaks to – the creation of enough. But when the fruits of society’s labor become maldistributed, when the rich get richer and the middle and lower classes struggle to keep their heads above water as is clearly the case today, then the system ultimately breaks down; boats do not rise equally with the tide; the center cannot hold.

Of course the wealthy fire back in cloying self-justification, stressing their charitable and philanthropic pursuits, suggesting that they can more efficiently redistribute wealth than can the society that provided the basis for their riches in the first place. Perhaps. But with exceptions (and plaudits) for the Gates and Buffetts of the mega-rich, the inefficiencies of wealth redistribution by the Forbes 400 mega-rich and their wannabes are perhaps as egregious and wasteful as any government agency, if not more. Trust funds for the kids, inheritances for the grandkids, multiple vacation homes, private planes, multi-million dollar birthday bashes and ego-rich donations to local art museums and concert halls are but a few of the ways that rich people waste money – and I must admit, I am guilty of at least one of these on this admittedly short list of sins. I have, however, avoided the last one. When millions of people are dying from AIDS and malaria in Africa, it is hard to justify the umpteenth society gala held for the benefit of a performing arts center or an art museum. A thirty million dollar gift for a concert hall is not philanthropy, it is a Napoleonic coronation.

So when is enough, enough? Now is the time, long overdue in fact, to admit that for the rich, for the mega-rich of this country, that enough is never enough, and it is therefore incumbent upon government to rectify today’s imbalances. "The way our society equalizes incomes" argues ex-American Airlines CEO Bob Crandall, "is through much higher taxes than we have today. There is no other way." Well said, Bob. Enough said, Bob. Because enough, when it comes to the gilded 21st century rich, has clearly become too much.

If gluttony describes the acquisitive reach of the mega-rich, then the same gastronomical metaphor applies to today’s state of the credit markets. Stuffed! Both borrowers and lenders may have bitten off more than they can chew, and even those that swallow their hot dogs whole – Nathan’s Famous Coney Island style – are having a serious bout of indigestion. Several hundred billion dollars of bank loans and high yield debt wait in the wings to take out the private equity and leveraged buyout deals that have helped propel stocks to Dow 14,000. And lenders…mmmmm, how do we say this…don’t seem to have much of an appetite anymore. Six weeks ago the high yield debt market was humming the Campbell’s soup theme and now, it’s begging for a truckload of Rolaids. Yields have risen by 100 to 150 basis points in response...

China: IP Pirates Hard to Control

♠ Posted by Emmanuel in Trade at 7/27/2007 03:00:00 PM

Entertainment news publication Variety notes that the Chinese government is once again asking for some leniency over current US efforts [1, 2] to obtain stronger IP compliance from China in the WTO. China claims that production lines are being smuggled into the country [!] by local gangs [!!] who often operate from caves [!!!] It sounds a bit too James Bond-meets-Tora Bora-ish, but sometimes the truth is stranger than fiction. It also raises questions as to why, if these things are true, China is lax on border control and keeping gang activity in check. I have previously ventured that software bandits are elusive, but I had no inkling that they were this elusive. What matters, ultimately, is whether China's American interlocutors are satisfied with these rather colorful explanations:

Most of the production lines for pirated DVDs are smuggled into China, law enforcement officials said, and are difficult to find once they are in the country as they are run by local gangs and often hidden in caves.

“Illegal production lines are the source of pirated discs and to seize these lines can effectively wipe out pirated discs in China,” police official Xu Hu told the Xinhua news agency.

However, most of the production lines are smuggled in from abroad, making them difficult to trace. “Some are using edge-cutting technologies. The lines are clustered in the developed coastal regions of China and most are hidden in dark rooms and even caves,” said Xu.

Xu said criminal gangs controlled the production. The police had scored some successes, shutting down 231 fake DVD production lines since 1996 which had the total capacity to make 220 million discs annually. The latest Hollywood movies are easily available on the streets of the major cities, either from hawkers or from stores, for just over $1 each.

Washington filed formal complaints with the WTO over copyright piracy and restrictions on the sale of US movies, music and books in China in April and the issue is a major sticking point in relations between the US and China. Hollywood reckons piracy costs over $6 billion a year, much of it in the Asia-Pacific region.

BMW on Beating Toyota & Co.

♠ Posted by Emmanuel in Supply Chain,Trade at 7/27/2007 02:43:00 PM

TIME has a fine article on how Germany's Bayerische Motoren Werke (BMW), maker of luxury cars coveted the world over, is finding ways to compete with the Japanese automotive steamroller led by Toyota. The headwinds blowing against Beemer are great, especially a strong euro compared to a weak yen. Alongside changes in governance that have allowed German firms like BMW to act more "neoliberally" (pardon) in dealing with labor and the like, BMW has also invested in making its production process handle a higher level of customization to meet clients' desires. BMW sacrifices sheer efficiency in terms of production output in exchange for more flexibility. So far, it's hard to argue with its results:

Cloth seats or leather? Sunroof or spoiler? Walk into any auto dealership to buy a new car, and you'll be offered a multitude of options. If it's a BMW you're buying, however, there's a twist: you can walk out of the showroom and change your mind later. Perhaps you'd really prefer the poplar interior trim to the brushed aluminum. Or maybe those retractable headlight washers would be useful after all. Your BMW dealer will be happy to oblige with as many changes as you care to make, until a cutoff point: six days before your particular car goes into production.

Not only is it a handy marketing device--"our cars are tailor-made," BMW's chief executive, Norbert Reithofer, can boast--but it's also profitable. BMW customers, it turns out, often have second thoughts. And when they do, they invariably add ever pricier accouterments. The company says customers change their orders more than 1 million times a year. BMW doesn't break out details of the additional revenue, but given the profit margins on many add-ons, "it's like a big dollop of cream on the cake," says Peter Schmidt, a British-based auto-industry consultant.

This ability to cater to fickle tastes is just one manifestation of an extraordinary flexibility that BMW has injected into a company that sold nearly 1.4 million cars last year, bringing in $65 billion in revenues. It's a flexibility that affects almost everything the firm touches, from the layout of its assembly lines to the working hours of its administrative staff to relationships with its unions and key suppliers. BMW has mastered the manufacturing fine art called mass customization: no two cars rolling through its assembly lines on any given day are identical. Its factories can cope with a model changeover during the course of a weekend without work stoppages. Detroit would take weeks...
[BMW] CEO Reithofer is more upbeat. Faced with low-cost competition from Asia and Eastern Europe, he says, "many German firms did their homework, and now they are benefiting from it." He thinks Germany could go further, for example, in reducing high nonwage labor costs. But Germany still has competitive advantages, he says, pointing to its traditional engineering prowess combined with a newer ability to cater to the needs of individual clients. The challenge, he tells TIME: "It's all about mastering complexity."

Drop in on BMW's Leipzig plant, and you can see what he means. It's the firm's newest, having opened just two years ago, with a luminous open-plan central building that houses white-collar workers and managers. It was designed by London-based architect Zaha Hadid, and its most striking feature is a conveyor belt that meanders inside the building just below roof level, carrying a steady stream of cars from the body shop to the paint shop. You can see it from almost everywhere in the building, including the cafeteria.

Robots do most of the work in the body shop, welding, riveting and bonding hundreds of components together. Robots also apply the four layers of water-based paint to each car. But it's on the assembly line that BMW differentiates itself from even its Japanese rivals. To be able to customize each car requires highly sophisticated logistics. Workers stationed at regular intervals on the line reach back for components in wire baskets that have been rigorously sorted into the right sequence. The complexity is visible to the naked eye: halfway along the line, just past the section where car bodies are bolted onto the drivetrain and chassis, a gray three-door 1-series sticks out amid a convoy of silver 3-series cars. In theory, the plant is set up to handle five or six different BMW models simultaneously, although for the moment it handles two.

The factory has been designed so that new production processes can be added to the assembly line at any time without disrupting the work flow. That's a huge advantage over more traditional lines, which need to be shut down for any changeover or addition. Several key suppliers are based in the plant, rather than in a nearby supplier park. Jörg Baumheuer says that makes for easy communication when problems arise. He's a manager at the French auto-parts firm Faurecia, which assembles cockpits and seats for BMW in Leipzig and some other plants. The advantage for Faurecia is that it doesn't need to truck in finished parts; it simply assembles them on the spot. That cuts inventories and improves speed and reliability; the firm needs just 20 minutes' notice to put together a customized cockpit. "It cuts out the last step of the supply chain," Baumheuer says. Moreover, since Faurecia's workers eat lunch at the same cafeteria as BMW's, interchange is easy and natural.

The degree of customization that is required means BMW isn't as ruthlessly efficient as Toyota in some respects, including the number of cars produced per worker per day. But there's a trade-off. "BMW is not prepared to sacrifice its ability to give consumers the car they want. The alternative would be reduced costs but not the ability to charge a premium for customized cars," says Garel Rhys, an auto-industry expert at Cardiff University. In the end, he says, BMW's marginal revenue from customization is higher than the marginal cost advantage it gives up.

US Nat'l Security...or Protectionism?

♠ Posted by Emmanuel in Security,Trade at 7/27/2007 01:59:00 PM

What we have here is yet another American effort to slow the inevitable: Given that America still continues to rack up massive current account deficits year in and year out, it is inevitable that foreigners will demand better than the "lousy" returns they get from American debt instruments according to Nouriel Roubini. Here is his commentary on foreigners buying equity stakes in US firms from the time when Chinese CNOOC was prevented from buying Unocal on, you guessed it, security grounds. The title says it all: "With the US current account deficit close to a trillion dollars of course foreigners will soon own most of the US capital stock":

The current political saga and debate about the purchase by a Dubai-based company of the management of six US ports misses the most crucial point: with a US current account deficit running towards $900b this year and probably above one trillion $ next year, in a matter of a few years foreigners may end up owning most of the U.S. capital stocks: ports, factories, corporations, land, real estate and even our national parks. This is basic accounting: if you run a current account deficit (import more than export, spend more than your income, save less than you invest) you need to borrow from the rest of the world to finance such excess of spending (on private and public consumption and investment) over your national income. And you need to borrow on net every year to the tune of the current account deficit. That is why countries that run current account deficits become net foreign debtors. There are only two ways in which this accumulation of foreign liabilities of a debtor country can occur: either debt (when you issue private or government bonds purchased by foreigners and when you borrow in the form of bank or other loans from foreigners) or equity that can take the forms of FDI (foreign direct investment when non-residents acquire a domestic firm or other domestic assets such as real estate or when they build a new factory in the US) or portfolio investment in the equity market. So, it is either debt or equity but in either case the foreign liabilities of the US go up and foreigners increase debt or equity claims against the US. It is as simple as that and, with a trillion $ current account deficit the US foreign liabilities will increase every year by a trillion dollars.
Now, until recently, foreigners have financed the US current account deficit more in the form of debt rather than equity. Since a good fraction of this current account deficit was driven in the 2004-2005 period by the growing US fiscal deficit, the foreigners have piled up more and more Treasury bills and bond. Indeed, by now over 53% of all Treasuries are held by non-residents, a good fraction of which by foreign central banks. But, increasingly, foreigners are starting to realize that exchanging their goods and services for lousy low-return IOUs of the US government is a most lousy deal for them. Why to hold Treasuries that give you a mediocre 4.5% return over 30 years when you can instead buy higher return capital such as US corporation, US factories, ports, real estate and any other asset currently owned by American in this great land of ours?

According to today's edition of the Financial Times, it seems America is keen on finding more ways to stave off the inevitable as much as it can by more closely scrutinizing prospective buyers of American firms on "security grounds." Again, it seems that the beggar (debt happy Uncle Sammy) is trying to be choosy as to how his creditors fund his profligacy. Whether Sammy gets his way, though, is an open question:

US takeovers by foreign state-owned companies will face heightened scrutiny by the inter-agency panel that investigates deals on national security grounds following the passage of a law that revamps the treasury-chaired vetting process.
The Foreign Investment and National Security Act, signed into law on Thursday by President George W. Bush, requires the Committee on Foreign Investment (Cfius) to conduct a full 90-day investigation of takeovers by government-owned companies unless the treasury secretary, or another cabinet-level official or deputy, determines they would not impair US national security...
“There are questions all around the world: how open is the US to foreign investment? What this bill does – it’s balanced – it really clarifies how we focus on those relatively few cases where there are national security issues. That’s where we want to spend our time,” Mr Paulson said.
The new law also intensifies scrutiny of deals involving critical technologies and infrastructure. [Take that, security threat China.]
The former Goldman Sachs chief executive said the new law made clear that the US needed to “look more closely” at takeovers by state-owned companies, but he was quick to add that the country remained “very open to investment”.
The bill was signed into law at a crucial time, according to some Washington observers who expect an influx of deals in coming months by government-controlled companies and investment vehicles eager to buy into US equities. In the past, such deals, such as the proposed takeover of Unocal by CNOOC of China, have elicited criticism from some lawmakers in Congress who say they represent a threat to US security and competitiveness.
Mr Paulson said the vast majority of investments in the US by foreign-state owned groups were focused on reaping greater returns and not necessarily assuming control of US assets. He added: “I’m not saying control is a bad thing”.
“We welcome direct investment, whether it’s [for] control or not control. There were a number of them last year that were reviewed by Cfius, that were resolved very quickly and quietly and without controversy,” Mr Paulson said.
Congress began formulating legislation to amend the Cfius process last year after the executive branch panel was lambasted for approving the takeover of port terminals by Dubai Ports World.

World's Cheapest Laptop at $150?

♠ Posted by Emmanuel in Education at 7/26/2007 06:26:00 PM

First things first: Let me start by noting that the long-awaited One Laptop Per Child (OLPC) computer is now entering production, some five years after the idea was first proposed according to BBC News. (Is it just for me or does the OLPC look a lot like the original iBook?) While I have some doubts over the financial viability of this project, there is no question that the intentions behind it are good and that it deserves to succeed despite its difficult gestation period.

As I will explain a bit later though, it is not the world's cheapest lappie top as it hits the street priced initially at $175 (see the breakdown of the machine's costs as well in the pie chart to the right). Still, the OLPC machine incorporates several novel technologies to compensate for the lack of electricity availability in many parts of the developing world and the harsh operating conditions. As an educator myself, I can testify to the often rough educational environments I must deal with. (Dear students, especially mine: I'm just kidding.) There is also a video feature posted together with the BBC's report. Do visit the BBC site as I cannot stream the video feature they have on their site:

Five years after the concept was first proposed, the so-called $100 laptop is poised to go into mass production.

Hardware suppliers have been given the green light to ramp-up production of all of the components needed to build millions of the low-cost machines.

Previously, the organisation behind the scheme said that it required orders for 3m laptops to make production viable.

The first machines should be ready to put into the hands of children in developing countries in October 2007.

"There's still some software to write, but this is a big step for us," Walter Bender, head of software development at One Laptop per Child (OLPC), told the BBC News website...

Since the idea was first put forward in 2002, the low-cost laptop has been both lauded and ridiculed.

Intel chairman Craig Barret famously described it as a "$100 gadget" whilst Microsoft founder Bill Gates questioned its design, particularly the lack of hard drive and its "tiny screen".

Other critics asked whether there was a need for a laptop in countries which, they said, had more pressing needs such as sanitation, water and health care.

Professor Negroponte's response has always been the same: "It's an education project, not a laptop project."

The view was shared by Kofi Annan, ex-secretary General of the UN. In 2005, he described the laptop as an "expression of global solidarity" that would "open up new fronts" for children's education.

And as time passed, even some of the critics have changed their stance. Earlier this month, Intel, which manufactures what was considered a rival machine, the Classmate PC, joined forces with OLPC.

The innovative design of the XO machine has also drawn praise from the technical community.

Using open source software, OLPC have developed a stripped-down operating system which fits comfortably on the machine's 1GB of memory.

"We made a set of trade-offs which may not be an office worker's needs but are more than adequate for what kids need for learning, exploring and having fun," said Professor Bender.

The XO is built to cope with the harsh and remote conditions found in areas where it may be used, such as the deserts of Libya or the mountains of Peru.

For example, it has a rugged, waterproof case and is as energy efficient as possible.

"The laptop needs an order of magnitude less power than a typical laptop," said Professor Bender. "That means you can power it by solar or human power."

Governments that sign up for the scheme can purchase solar, foot-pump or pull-string powered chargers for the laptop.

And because it may be used in villages without access to a classroom, it has also been designed to work outside. In particular, the green and white machines feature a sunlight-readable display.

"For a lot of these children it's their only book and we want them to have a first class reading experience," said Professor Bender.

The XO will be produced in Taiwan by Quanta, the world's largest laptop manufacturer.

The final design will bring together more than 800 parts from multiple suppliers such as chip-maker AMD, which supplies the low-power processor at the heart of the machine...

"We certainly believe very strongly in the mission and vision of OLPC so finally starting to see it come to fruition is not only gratifying, it is also rewarding."

Test machines, on which the final design is based, are currently being put through their paces by OLPC.

"We keep laptops in the oven at 50 degrees and they keep on running," said Professor Bender.

Field testing is also being done in countries such as Nigeria and Brazil.

The XO currently costs $176 (£90) although the eventual aim is to sell the machines to governments for $100 (£50).

Well, what's the world's cheapest laptop, then? I was visiting the CNET site when I came across yet another contender for world's cheapest laptop computer honors on the crave blog. According to CNET, the Swedish firm Medison may offer the world's cheapest laptop at $150, thus undercutting the OLPC by $25. Unlike the OLPC, the Medison unit is very mainstream and full-featured--it is designed to function like a conventional laptop, albeit while being sold at an especially affordable price. What is very surprising to me is that the specifications of this $150 machine seem to be alike those of a far more expensive machine. If this thing were sold for thrice the price, I would not raised an eyebrow. Take a look for yourselves:

Intel® Celeron 1.5 GHz CPU
14" Widescreen X-bright LCD
256 MB Ram memory
40 GB Hard Drive
802.11g Wireless LAN
Optimized Linux operating system
Pre-installed office and multimedia applications

Holy moley! The posters on the crave blog are also wondering whether this is the real deal as it seems to be a heck of a lot of computer for $150. Of course, these two different units are not direct competitors. The OLPC machine is designed for education markets in the developing world, whereas the Medison appears to be designed for bargain shoppers in the developed world. These are interesting times for computing, especially with the Intel $320 machine being available as well. My choice? I'd probably fo for the Medison if it's the real deal. At $150 and a feature set like that, it's no slouch for a machine at any price.

Combating Software Counterfeiting

♠ Posted by Emmanuel in Trade at 7/26/2007 05:28:00 PM

Here in the Far East, there too is a flood of pirated software from China and Taiwan. Visit street markets in Ho Chi Minh City, Bangkok, Jakarta, Kuala Lumpur, or Manila and you will see pirated software hawked rather openly. Before getting to the stories concerned, let me get two points across. First, it is often assumed that counterfeiters sell shoddy goods. When it comes to software, though, I demur. The problem with this assumption is that even software pirates are not immune to marketing considerations. If their wares constantly didn't work or fouled up users' computers, repeat customer purchases would not be forthcoming. Hence, I have found that it is the exception--not the rule--that pirated software doesn't work. The packaging is often quite spiffy too. Can you tell which is the Vista fake between the two packages below? Instead, the problem that I have found with pirated software is that updates and patches made available online do not usually run with pirated software--as they shouldn't. Hence, I usually buy the real thing to ensure that upgrades do update.

Second, I don't think that America's current efforts to weed out software piracy in China will have much of a lasting effect on the availability of pirated wares. The equipment you need for replicating software is not complicated--a CD-ROM or DVD making machine is hardly expensive or difficult to procure. China makes the stuff today. Tomorrow perhaps Vietnam, after that Cambodia, then maybe Africa and so on. Plus. breaking codes is child's play. To me, finding new means of delivering content that are not subject to piracy is a better avenue for software makers to pursue rather than adopting a knock-their-heads approach to enforcement. Let me plug my fave blogging platform, for example--Blogger. Heck, I would still choose Blogger even if you gave me the option of choosing paid services like Typepad and WordPress. Blogger and other Google services aren't prone to piracy as the Google business model isn't based on distributing software in boxes. Now, let's first take a look at the OECD's recent statements on piracy care of the BBC:

At least $200bn (£100bn) worth of counterfeit goods were sold in 2005, an Organisation for Economic Cooperation and Development (OECD) report has said.

But the total value of counterfeit items made and sold worldwide - from medicine to computer software - could be much higher, the OECD added.

It said the products made were "often substandard" and "can even be dangerous".

The OECD called on nations to increase the action taken against the crime.

The $200bn approximation, based on data from customs seizures in OECD countries, did not include fake and pirated goods which were made and sold in the same country.

Digital products, distributed via the internet, were also not factored into the total.

"If these items were added, the total magnitude of counterfeiting and piracy worldwide could well be several hundred billion dollars more," the OECD said...
In addition to items such as computer software and DVDs, car parts, medicines and electrical components were among the types of goods identified by the report.

China was recognised as the largest source of pirated goods - accounting for about 86% of goods confiscated.

In other findings, the Middle East was identified as the biggest market for fake car parts, while the consumption of counterfeit cigarettes was highest in Latin America, Africa and Asia.

"Counterfeiting and piracy are illicit businesses in which criminal networks thrive," the report said.

"The report shows that the items that they and other counterfeiters and pirates produce and distribute are often substandard and can even be dangerous."

The International Chamber of Trade (ICC) welcomed the "comprehensive and thorough investigation of the problem" and also called on governments to act swiftly to crush these crimes.

The world business body estimated the total value of counterfeit and pirated goods worldwide is more than $600bn, but even this was the "tip of the iceberg".

It said the OECD failed to factor in the broader impacts - including those on employment, consumer health and safety and tax revenues.

"The costs to society and economies around the world are enormous," said ICC secretary general Guy Sebban.

A European Union study, published last month, found that the number of counterfeited items seized by customs officials had trebled in 2006 against the previous year.

And here is the more recent BBC report on the US busting up a large China-based counterfeiting ring:

Pirated software worth $500m (£250m) has been seized as the FBI shuts down a world-spanning piracy outfit.

Before the raids the Chinese counterfeiting syndicate was thought to have sold and distributed software worth more than $2bn.

The FBI and China's Public Security Bureau arrested 25 people during the two-week operation against the pirates.

Despite recent crackdowns, industry figures suggest that 82% of the software used in China is counterfeit.

The FBI said it had been building up a case against the piracy syndicate for years before staging the raids on the software production plants in China's Guangdong province.

During the raids, dubbed Operation Summer Solstice, the FBI seized more than 290,000 CDs with a claimed market value of $500m.

The gang was known to be producing pirated versions of 13 of Microsoft's most popular programs including Windows Vista, XP and Server as well as Office 2003 and 2007...

In a statement Microsoft said vital information that helped to track down the pirates came from its Windows Genuine Advantage (WGA) scheme.

WGA forces users of some versions of Windows to validate their copy of the operating system with Microsoft when updating their software.

Microsoft said information gathered by WGA from more than 1,000 fake copies produced by the counterfeiters and sold around the world helped law enforcement agencies home in on the pirates. Fake software produced by the group was found in 27 countries.

"Countries around the world are expected to experience a significant decrease in the volume of counterfeit software as a direct result of this action," said Microsoft in its statement. [Don't bet on it.]

China in Sudan: a Positive View

♠ Posted by Emmanuel in Africa,China,Trade at 7/25/2007 02:48:00 PM

Two Harvard scholars, Jason Qian and Anne Wu, have recently made an op-ed in the Boston Globe that is a lot more favorable in its outlook on China-Sudan ties in particular and China-Africa ties in general. In contrast to the "new imperialism" view I generally hold, they have one that veers towards "constructive engagement." I must admit that I am not really convinced by their arguments. For instance, there is no mention of the tied aid China seems intent on giving, but their arguments deserve to be heard nonetheless:

Some in the West have recently begun referring to the 2008 Beijing Olympics as the "Genocide Olympics" because of China's continued business ties with Sudan and its reluctance to intervene decisively in the Darfur conflict. Is China really turning a cold shoulder to the humanitarian crisis in Darfur, or has the explosive charge of complicity in genocide blinded observers to China's aid and quiet diplomacy in Sudan?
Global outrage is growing over the massacre in Darfur; Beijing is not exempt from this feeling. But there is a significant difference between China and the West in approaching the issue.
China's strategy is one of humanitarian and development aid plus influence without interference, in contrast to the West's coercive approach of sanctions plus military intervention. Through high-level diplomacy -- such as Chinese President Hu Jintao's visit to Sudan in February and the dispatch of special envoys -- and multilateral platforms such as the United Nations and the China-Africa summit, China has been making tactical moves to press the Sudanese government to comply with the international community's requests. China deserves credit for securing Khartoum's agreement on allowing UN peacekeeping forces in Darfur.
China's approach toward the Darfur crisis takes the long view. It perceives the root causes of the turmoil as poverty and a lack of resources, which have led to decades of fighting between local tribes and ethnic groups over basic necessities, such as water resources, land, and infrastructure. Therefore, China's approach to solve the long-lasting conflict in the Darfur region has been to provide comprehensive development assistance in addition to humanitarian aid.
Beijing has agreed to offer $10.4 million of humanitarian aid to Darfur and delivered half of the aid during its special envoy's trip to Sudan in May. Beijing also has invested $30 million in a dam project in the northern part of Darfur, as well as provided goods and materials for building more than 120 schools, facilities for transportation and electric generation, and other necessities for economic development. China also plans to send 275 military engineers [as peacekeepers] to a UN force this month to implement initial stages of the Kofi Annan peace plan, which bolsters African Union peacekeeping forces in Darfur.
The lack of progress in stopping the massacre and the slow effect of the development aid has left China in an awkward position. On the one hand, due to its foreign policy principle of non interference, as well as its investment in Sudan, Beijing traditionally has been reluctant to put strong pressure on Khartoum, believing that wielding sticks would only prove counterproductive. On the other hand, outsiders assume that China's substantial interest in Sudanese oil gives it persuasive power over Khartoum.
However, China's political influence in Darfur should not be overvalued. At the same time that Beijing's investment in Sudan provides economic leverage, it also makes Beijing a hostage. Consistent with its non interference foreign policy, China does not attach political conditions to its economic relationship with Khartoum, thus making it a more credible partner to Sudan.

When Western leaders press Beijing to flex its economic muscles in the Darfur crisis, they often underestimate the tendency of African countries -- including Sudan -- to resist influence from external forces. Beijing will lose its credibility and de facto influence if it overreaches its will politically. The effective influence that Beijing can exert over the Darfur crisis lies in its delicate balance between practicing an influence-without-interference strategy and maintaining the hard-won trust of the Sudanese government.
Frankly, it seems more convenient for Western leaders to blame China than to face their own responsibilities for a humanitarian crisis that they could do far more to stop. Given Washington's oil-centered foreign policy throughout the past whole century and its previous record of violating the UN-sponsored sanctions against South Africa's apartheid government under the "Constructive Engagement" argument, it seems the current outcry against China is at least partially a tactic to divert public attention.
When judging China's Sudan policy, one must also bear in mind that this is an integral part of China's overall policy toward Africa. China no doubt has its own interests in Africa, but its engagement there equally and sincerely takes into account the interests of African countries -- and their desire to, foremost, promote economic development. China's investments in Africa have extended beyond just oil and other natural resources to other areas where infrastructure development is needed.
As Harry Broadman, an economic adviser to the World Bank's Africa Department, mentioned in an interview, "The Chinese are making investments in light manufacturing, water services, food processing, textiles, telecommunications and tourism, and in other kinds of noncommercial infrastructure . . . Regardless of whether it is equity or debt, they are filling gaps in investment in Africa which are needed."
In response to the "new imperialism" charges against China's engagement with African countries, President Levy Patrick Mwanawasa of Zambia has said that China provides aid, offers loan deductions or exemptions, jointly develops resources, and invests in basic infrastructure, leaving the added value in Africa. It is hard for him to see these as "imperial" actions, since they contrast sharply with the actions of European imperialists in past centuries, who exploited Africa's rich natural resources and ran away, profiting at the expense of the poor local people. Beyond development cooperation, China's principle of exerting influence but not interfering and imposing is consistent with African practice, and the final political decision will have to be made by Africans.
In the face of increasing pressure from the international community, China may consider bolder options. However, the rest of the world should not simply play the blame China game. If there is a linkage between the Darfur crisis and Beijing Olympics, it should lie in the West and China together using the spirit of the Olympics -- mutual understanding, friendship, solidarity, and fair competition -- with their sympathetic hearts to collectively create a better future for Darfur.

Baum: "Imported Inflation" an Iffy Idea

♠ Posted by Emmanuel in China,Trade at 7/25/2007 02:25:00 PM

The always-provocative Caroline Baum, columnist for Bloomberg, has put her thoughts on the possibility of "imported inflation" to writing. She is skeptical of the idea, citing central banks' largely undiluted influence over the matter. The scenario which gets this story going is simple: China used to be a "deflationary" force of globalization as lower-cost products were being made there more and more to the benefit of price-conscious consumers. However, this trend seems to be fading as China "has gone over to the dark side" (her term, not mine) since prices of Chinese imports in the US have gone up in recent months. Whether due to a somewhat stronger yuan, less export-tax rebates, or higher raw material costs, China's goods are becoming costlier:

For years globalization was touted as undisputed good news in terms of the low prices it delivered to consumers. It was unqualified bad news only if you happened to be the fellow who made the goods now being produced in China.
Now the tide has turned. After more than a decade of ``exporting'' deflation, China has gone over to the dark side, according to U.S. government statistics. The price of Chinese imports to the U.S. has risen in the last few months, triggering predictable reactions based on faulty assumptions.

Specifically the question is, can one country import inflation from another? In the case of China and the U.S., it depends on whether one is flying from east to west or west to east.

China pegs its currency to the U.S. dollar. In other words, it has adopted U.S. monetary policy as its own. If the U.S. inflates, China inflates, not the other way around.

``If China had an independent monetary policy and its currency wasn't linked, rising prices would be offset by a falling currency and the U.S. wouldn't see any effect,'' says Jim Glassman, senior U.S. economist at JPMorgan Chase & Co.

The broader issue is whether a sovereign nation with an independent central bank can import inflation -- or deflation -- from overseas.

The answer is, it depends on what the monetary authority in the importing country does. A sovereign central bank isn't a ``price taker,'' or an inflation accepter. Instead, it always has the ability to offset any relative price change, be it in domestic or foreign goods, with tighter monetary policy.

Forget about borders and exchange rates for a moment and think about individual prices in the domestic economy. Let's say the price of oil goes up because demand increases. Is that inflationary?

Former Federal Reserve Chairman Alan Greenspan used to explain to Congress that relative price changes are not inflationary per se. That is as true for the price of oil as it is for the price of labor (wages), although you'd never know it from listening to policy makers.

For a given stock of money, a rise in the price of oil may translate into a one-time rise in the price level. With time, the price of something else will fall as consumers cut back on non-oil purchases.

The same is true for the price of imports. If consumers have to pay more for items made in China, they will have less money to spend on domestic goods and services and other foreign imports --unless the central bank accommodates those higher prices by allowing the money supply to increase.

So it is always and everywhere the province of the central bank to determine its domestic inflation rate.

Fed Governor Don Kohn and San Francisco Fed President Janet Yellen have challenged the notion that central banks have to passively accept whatever price increases are thrust on them from abroad.

``In the end, however, policy makers here and abroad cannot lose sight of a fundamental truth: In a world of separate currencies that can fluctuate against each other over time, each country's central bank determines its inflation rate,'' Kohn said in a speech to the Boston Fed's 51st Economic Conference in Chatham, Massachusetts, on June 16, 2006.

While it's too early to assess the inflation implications of the increased integration of goods and markets, ``it is also clear that such developments do not relieve central banks of their responsibility for maintaining price and economic stability,'' Kohn said.
Here, here. Another decade of globalization won't change the basic reality either.

``With respect to monetary policy, I find nothing either in theory or the existing empirical evidence to overturn the conclusion that a country like the United States, operating under a flexible exchange rate regime, can ultimately achieve the inflation target of its choice,'' Yellen said in a May 2006 speech...

The departure point for some recent studies on the role of globalization is the low and stable inflation globally accompanying increased economic integration. A recent working paper by economists Claudio Borio and Andrew Filardo...concedes that better monetary policy, with central banks around the world adopting implicit or explicit inflation targets, explains the improved performance.

Still, the economists found some ``prima facie evidence'' of the role of ``global slack'' in national inflation, leading the authors to question the ``near-term effectiveness of domestic policy levers...''
To the extent that domestic inflation is increasingly influenced by ``global capacity constraints, this could weaken the near-term efficacy of monetary policy levers because of their limited (i.e. domestic) reach,'' they said.

If ``globalization'' and ``common external shocks'' are the main contributors to inflation, not common monetary policies, ``this would imply that national central banks' ability to steer domestic inflation has been severely reduced,'' said Joachim Fels, chief fixed-income economist at Morgan Stanley in London, in an e-mail response to my question.
As long as globalization doesn't mean one world central bank...``flexible exchange rates give countries the independence to set their own inflation goals,'' Glassman says. ``That insulates everyone else from what you choose to do.''

And as for price shocks, the central bank has the ability to offset them, whether they occur at home or abroad. Inflation isn't transmitted via spores in the air. It's a monetary phenomenon, and as such, starts and ends on native shores.

Globalization hasn't made central banks impotent. To the contrary, their unity of purpose in the goal of price stability has made them more powerful.